Knowledge that Transforms

While Islamic bonds are playing an increasingly important role for companies in emerging markets, the pricing of their risk by investors remains unexplored. We examine the impact of credit ratings on the yield-at-issuance of Islamic bonds and compare it to that of conventional bonds. Analysing 1560 Islamic bonds issued in emerging markets between 1997 and 2018 and comparing them to 837 comparable conventional bonds, we find that Islamic bonds offer lower yields than conventional bonds for a given rating, even after controlling for differences between the two populations. This suggests that investors are pricing in less credit risk in Islamic bonds. We explore several explanations for this phenomenon. We find that periods of relatively lower supply in the Islamic bond market contribute to the under-pricing of risk for a given rating. Religious preferences likely drive the segmentation of the two markets in terms of risk pricing.

The study investigates the impact of collective empathy on corporate green innovation from the perspective of war heritage. Drawing on stakeholder theory and empathy theory, we argue that collective empathy fosters corporate green innovation by generating public emotional empathy toward local descendants of war victims and enhance cognitive empathy within firms regarding the environmental needs of local communities. Analyzing data from Chinese-listed firms in heavily polluting industries between 2010 and 2019, we find that collective empathy significantly encourages green innovation efforts. Mechanism analyses indicate that collective emotional and cognitive empathy serve as key pathways in this relationship. Furthermore, state-owned ownership and formal institutions reinforce and complement the positive effect of collective empathy on corporate green innovation.

Despite being thought of as a governance mechanism, CEO inside debt seems to distort firms' information environment. Our results indicate that CEO inside debt alters managerial orientation and incentives in a way that increases stock price crash risk. Our results are robust after addressing endogeneity using the instrumental variable (IV) approach, a difference-in-differences test based on the implementation of Internal Revenue Code Section 409 A Final Regulations, and Oster's omitted variable diagnostic test, and selection bias using the propensity score matching (PSM) and Entropy balancing (EB) approaches. The results are stronger for firms that are poorly governed, operate in less competitive industries, have lower institutional ownership, have higher information asymmetry, and pay less dividends. Further, the results are robust to controlling for CSR, local religiosity, tax avoidance, financial opacity, CEO power, and CEO as well as local political ideology.

We analyze online stock posts to identify dynamic intercity investment preferences among Chinese investors. By inferring city connections using recent posts on local stocks mentioning other cities, we find that firms in highly connected cities exhibit higher stock valuations, greater turnover, higher idiosyncratic volatility, improved liquidity, and reduced crash risk. The network effects are more pronounced among less visible firms and induce intercity return comovement. Better stock performances in connected cities predict subsequent local stock return reversals as well as elevated intercity retail block trading. Our findings suggest that city connectivity, revealed through social media content, influences firm outcomes, investor behavior, and market efficiency.

This paper examines the relationship between focal firms’ corporate social responsibility (CSR) and the financial constraints of their industry peers. We find that focal firms reduce their CSR investments in response to an increase in competitor financial constraints. Our findings are robust to two exogenous shocks: the 2008 financial crisis and the American Jobs Creation Act of 2004. We further show that product market competition drives our results by motivating firms to reallocate resources and prioritize investing in core business activities rather than CSR when peers face difficulty accessing funds. Intriguingly, the fading of such virtues does not necessarily lead to a decline in firm performance. We find that the reduction in CSR induced by peer financial constraints improves the profitability, operating efficiency, and market power of focal firms while attracting more institutional investors.

Oracle nodes enable smart contracts to access off-chain and cross-chain data, thus bridging information among digital networks and with the real economy. However, reliance on external input creates security and reliability risks in information aggregation and transfer. We describe the general oracle problem, introduce the Oracle Trilemma – highlighting the trade-offs between scalability, decentralization, and truthfulness – and discuss relevant economic issues concerning the role of oracles in applications such as DeFi, supply chain management, gaming, and prediction markets. In particular, we survey off-chain reporting, off-equilibrium alerting, and dynamic incentive design as promising approaches to resolving the trilemma. We further list oracle vulnerabilities and evaluate oracle sustainability through staking and tokenomics programs. Finally, we highlight empirical studies on how oracle integration affects DeFi adoption, token valuation, liquidity, and system risks. We conclude by presenting emerging trends and suggesting open research questions.

Using an earnings-based structural model, calibrated with US data for the period 2001–2017, we examine how the structure of an interest expense cap for the deduction of interest expense changes the tax benefits of debt. We find that an EBIT (EBITDA) based cap reduces the marginal tax benefits of debt by 6 percentage points (4.6 p.p.) of unlevered firm value for a typical firm. This impact differs across industries due to variations in industry-specific labor and physical capital deployed, and the associated depreciation. An EBITDA-based structure for a cap reduces the differential tax impact of a cap across industries. Our results are widely applicable in determining the cost of debt in the presence of these cap structures, enshrined in the US and OECD countries.

This study explores the influence of U.S. Environmental Protection Agency (EPA) enforcement on corporate green innovation, as measured by green patent counts and citations. Our findings show that EPA-enforced firms experience a substantial uptick in green innovation outputs. This boost can be attributed to enhanced green innovation efficiency and increased hiring of green inventors. Moreover, this effect is more pronounced for firms headquartered in states with stronger environmental enforcement intensity, firms with higher institutional ownership, and firms with fewer financial constraints. Finally, we find that green innovations help enforced firms avoid future EPA enforcements and reduce toxic chemical releases. Taken together, these results imply that EPA enforcement actions can indeed foster positive impacts on corporate green innovation.

This study investigates how the Uniform Fraudulent Transfer Act (UFTA) shapes venture capital (VC) investment strategies and startup outcomes. Using data on 34,578 VC-backed startups from 1977 to 2019, we find that the UFTA inadvertently leads VC investors to prioritize existing portfolio companies over new investments, resulting in longer funding durations. Startups subsequently rely more heavily on secured debt and experience diminished innovation outcomes. Additionally, under heightened financial pressure, startups commit violations more frequently, particularly employment-related offenses. Nonetheless, startups backed by more experienced VCs demonstrate stronger innovation performance and are more likely to achieve successful exits through initial public offerings.

This paper examines corporate mergers and acquisitions (M&A) outcomes under lender scrutiny. Using the unique shocks of U.S. supervisory stress testing, we find that firms under increased lender scrutiny after their relationship banks fail stress tests engage in fewer but higher-quality M&A deals. Evidence from comprehensive supervisory data reveals improved credit quality for newly originated M&A-related loans under enhanced lender scrutiny. This improvement is further evident in positive stock return reactions to M&A deals financed by loans subject to enhanced lender scrutiny. As companies engage in fewer but higher-quality deals, they also experience higher returns on assets. Our findings highlight the importance of lender scrutiny in corporate M&A activities.